Equi-Marginal Utility - Supply Analysis, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

Hi friends! Say I give you a friend
rupees hundred and ask him to buy three
commodities.Sandwiches chips and a few
chocolates the prices for which are
chocolate for rupees 8 sandwich rupees
16 and Chips for Rs. 12 and now, if I
ask you the question how much quantities
of each product will your friend buy?
well here your answer might be, I don't
know that's up to him. Hmmm.. but if I ask
you the question on what basis will he
decide how much quantity of each product
to buy? Tricky question right? Don't worry!
All your questions will be answered
welcome to the Sagar Raut Channel and
today we learn the law of equal marginal
utility. Assuming that your friend is
normal he will try to spend his income on
all three commodities in such a way that
he attains maximum satisfaction. And the
way he will do it is by applying this
formula, that is by equating the ratio of
marginal utility to price of all three
commodities. Don't worry.. you'll
understand it in a while. For now just
remember that your friend has to spend
rupees hundred on all three commodities
in such a way that he attains maximum
satisfaction. Let's assume that you're
given with the marginal utilities your
friend derives from the additional units
of sandwich. Which means when you Friend
eats first sandwich he gets 128 units of
utility from the second sandwich his
utility decreases to 96 units and so on.
Now to find the ratio we need to apply
this formula, that is marginal utility
upon price. We know that the price of the
sandwiches rupees 16 and the marginal
utility from the first sandwich he
derives is rupees 128 hence the ratio
will translate to 8. Similarly let's say
we have the data for marginal utilities
of chips and chocolates as well.
Now if possible pause the video and
please try to understand the schedule
first so that it's easier for you to
grasp what's next. Okay? All right!
Remember as a rational consumer your friend
will try to equate the ratio of
marginal utility to price of the three
commodities. Let's say your friend
equates the ratio of 8 of the three
commodities. In that case he'll be
consuming one sandwich of rupees 16
two Chips for rupees 24
and three chocolates for rupees 24. However by doing this your friend
is not spending the entire hundred
rupees but only 64 rupees and we
wish to know how will they spend his
Rs. 100 to gain maximum
satisfaction. Okay! Let's try it with the
second ratio. Let's say your friend tries
to equate the ratio of 6. In that case
your friend will have to buy two
sandwiches worth rupees 32. Three
chips worth rupees 36 and for
chocolates worth rupees 32. This
way he'll be spending his entire 100
rupees. So what does this mean?
Remember our original question of how
will your friend allocate Rs.100
to gain maximum satisfaction from it? So,
given two Rs.100, your friend will
buy 2 units of sandwich
3 units of chips and 4 chocolates
to gain maximum satisfaction. The law of
equal marginal utility is actually based
on many assumptions,
however the assumptions that you all
need to know are of rationality and
Cardinal utility. Rationality states that
your friend is a complete normal person
and he does everything as a normal
person and nothing superhuman or
extraordinary. Secondly, remember from the
first video of consumer behaviour in
utility analysis we learned that utility
can only be measured
ordinally, i.e we cannot give numbers
and say that I got 10 units of
satisfaction from this commodity that 20
units of satisfaction from the other
commodity. We can only say that I liked
certain commodity more or something less.
However, in this law we assume that
cardinal measurement of utility is
possible. Hope you liked the video guys
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forget to comment on this video. Till
then adios.. Hasta la vista